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In the first appellate court decision to consider the issue since FTC v. Actavis, 133 S. Ct. 2223 (2013), the Third Circuit recently held that non-cash consideration, including “no-AG agreements,” can constitute an actionable payment. SeeKing Drug Co. of Florence, Inc. v. Smithkline Beecham Corp. d/b/a GlaxoSmithKline, No. 14-1243, 2014 WL 9954190 (3d Cir. June 26, 2015). The court had two questions before it: (1) whether, in general, payments in some form other than cash trigger rule-of-reason scrutiny under Actavis, and (2) if so, whether an agreement by a branded firm not to launch an authorized generic (a “no-AG agreement”) could qualify as an actionable payment. The court answered both questions affirmatively.

Defendant GlaxoSmithKline (GSK), the manufacturer of branded LamictalÒ (generic name lamotrigine), had brought a patent infringement lawsuit against Teva Pharmaceutical Industries Ltd. (Teva), a generic drug manufacturer, after Teva filed an Abbreviated New Drug Application challenging the validity of the LamictalÒ patent. Following a district court ruling that one of the LamictalÒ patent claims was invalid, but before reaching the other claims, GSK and Teva settled their patent infringement suit in 2005. Under their settlement, GSK gave Teva an exclusive license to sell a generic version of LamictalÒ on July 21, 2008, in the event that FDA awarded GSK an additional period of exclusivity for performing certain pediatric studies (a “pediatric exclusivity extension”), or on March 2, 2008, if FDA did not—with the patent expiring on July 22, 2008. In either case, the settlement gave Teva the right to sell generic Lamictal several months before the period of exclusivity covering the patent ended. In addition, Teva received the right to launch a chewable tablet formulation of the drug approximately three years before patent expiration. The license granted to Teva was wholly exclusive, even as to GSK, meaning that GSK would be prohibited from launching its own “authorized” generic version of LamictalÒ during Teva’s statutory 180-day generic exclusivity period.

Plaintiffs in King Drug—a putative class of direct purchasers—sued GSK and Teva, arguing that GSK’s agreement not to launch an authorized generic during Teva’s statutory exclusivity period constituted an illegal “reverse payment” under Actavis. Specifically, plaintiffs claimed that, but for the settlement agreement, Teva would have launched its generic product “at risk” (i.e., while Lamictal still had patent protection) after receiving FDA approval for its product—almost two years earlier than the launch date agreed to in the settlement. Plaintiffs argued that the so-called “no-AG” provision conferred a “substantial financial benefit” that “induced” Teva to delay the launch of its generic. Plaintiffs alleged no other specific financial details of the settlement.

Finding that a settlement must involve cash consideration in order to constitute a “reverse payment” under Actavis, and therefore that the settlement at issue was not subject to a rule of reason analysis, the U.S. District Court for the District of New Jersey dismissed the complaint, observing that the majority and dissenting opinions in Actavis both “reek with discussion of payment of money.” In re Lamictal Direct Purchaser Antitrust Litig., 18 F. Supp. 3d 560, 567 (D.N.J. 2014). In so holding, the district court acknowledged that “Teva surely ‘received consideration,’ or otherwise would have had ‘no incentive to settle’” (Id. at 568), but emphasized the Supreme Court’s repeated references to payments in the Actavis decision. Id. at 567-68.

On Friday, June 26, the Third Circuit reversed the district court’s opinion, holding that agreements involving non-cash consideration can constitute “reverse payments” under Actavisand, more specifically, a no-AG agreement can constitute such consideration that gives rise to a full rule of reason analysis. Specifically, the court stated that the no-AG agreement in this case could “represent an unusual, unexplained reverse transfer of considerable value from the patentee to the alleged infringer and may therefore give rise to the inference that it is a payment to eliminate the risk of competition.”

The Third Circuit observed that the “no-AG agreement here may be of great monetary value to Teva as the first-filing generic” and that launching an authorized generic would have been economically valuable to the brand. Therefore, a no-AG agreement could present the “same type[] of problem[s] as reverse payments of cash” and have “anticompetitive consequences . . . as harmful as those resulting from reverse payments of cash.”

The court rejected defendants’ argument that a no-AG provision is merely a form of exclusive license expressly contemplated by the patent laws. The court noted that the right sought by defendants was not the right to grant any sort of license but rather the “right to use valuable licensing in such a way as to induce a patent challenger’s delay.” The court found that the ActavisCourt had rejected such a right because a patentee is not allowed to “leverage[] some part of its patent power . . . to cause anticompetitive harm—namely elimination of the risk of competition.” The court reasoned that just because a patentee may have the right to grant a license, that “does not mean it also has the right to give a challenger a license along with a promise not to produce an authorized generic—i.e., a promise not to compete—in order to induce the challenger” to drop its patent challenge. Finally, the court went on to note that the issue in this case is one of antitrust law—not rights under the Patent Act—and that it was making “no statement about patent licensing more generally.” The Court’s intent appears to be not to eliminate patent owner’s right to grant exclusive licenses generally, but only to subject such licenses to antitrust review where there is a plausible claim that the exclusivity right is a quid pro quo for an agreement by the recipient not to compete where it otherwise could.

The court further rejected “defendants’ attempt to recharacterize Teva’s gain as resulting from its early entry alone, a form of consideration Actavis recognizes as permissible. The court found “that characterization [] inaccurate as a descriptive matter” because GSK’s agreement not to launch an AG “gave Teva [] a 180-day monopoly over the generic market.” That is, during Teva’s exclusivity period, but for the no-AG provision, GSK would have entered the market with a competing generic product. The court also rejected defendant’s characterization because it found that “a no-AG agreement is no more solely an early-entry licensing agreement than the settlement inActavis itself, where entry was permitted 65 months before patent expiration.” The court went on to explain the issue: “Notwithstanding such ‘early entry,’ the antitrust problem (in Actavis) was that, as the Court inferred, entry might have been earlier, and/or the risk of competition not eliminated, had the reverse payment not been tendered.”

The court, therefore, held that “this no-AG agreement, because it may represent an unusual, unexplained transfer of value from the patent holder to the alleged infringer that cannot be adequately justified—whether as compensation for litigation expenses or services, or otherwise—is subject to antitrust scrutiny under the rule of reason.” And, the court further ruled that plaintiffs had satisfied their pleading burden under Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) andAshcroft v. Iqbal, 556 U.S. 662 (2009), noting that it did “not read Actavis to require allegations that defendants could in fact have reached another, more competitive settlement.”

After reaching that conclusion, the court further stated that the district court erred when it found that the settlement at issue would “‘survive Actavis scrutiny’” because the court failed to conduct a proper rule of reason analysis. The court proceeded to outline, relying on Actavis, a three-part rule of reason analysis to be applied in a so-called “reverse payment” case. First, plaintiffs must prove an anti-competitive effect in the form of a “payment for delay, or, in other words, payment to prevent the risk of competition.” As the court noted, quoting Actavis, “‘The likelihood of a reverse payment bringing about anti-competitive effects depends upon its size, its scale in relation to the payor’s anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification.’” Then, the burden shifts to defendants to show “‘that legitimate justifications are present, thereby explaining the presence of the challenged terms and showing the lawfulness of those terms under the rule of reason.’” Again quoting Actavis, the court noted that “[t]he reverse payment, for example, may amount to no more than a rough approximation of the litigation expenses saved through the settlement [or] . . . compensation for other services that the generic has promised to perform—such as distributing the patented item or helping to develop a market for that item. Finally, plaintiffs “will have the opportunity to rebut” defendants’ explanation.

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